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The Railroad Week in Review 4/26/97
featuring: The Breakup of Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern

Last week was Earnings Week in New York and I was able to get to four sessions: BNSF, NS, Canadian National, and CSX. By and large the stories were good, and you can check the respective web pages for the details. It may be more helpful if we hit a few of the highlights as they relate to managing the railroads and what's coming down the pike.

The BNSF story was weather. Earnings for the quarter were off some 20% on flat revenues of $2 billion. Snowfall was more than abnormal. Stampede Pass saw 614 inches where 329 is average. Stevens Pass was 630 inches against an average of 433 inches. And if it wasn't snow it was mud. Portland, Olympia, and Seattle each had three to four feet of downpour November-March.

Affected lines in Washington and Oregon were closed from two to five days in the quarter, backing up trains and adding costs for evrything from car hire to overtime. Further east in Montana and the Dakotas, line closures ranged from one day in Stryker MT to 15 days in Aberdeen SD. Says BNSF, "The total weather cost is virtually impossible to measure with precision," yet even at that some $100 MM in revenue opportunity was lost and $50 MM in expense (protracted outages, the cost of repairing track, signals and equipment, and operating inefficiencies) was added. It will probably be May before all the effects have finished cascading through the system.

The other news from Ft Worth had to do with the effects of the UP/SP routes, which in effect amount to starting a whole new railroad. With new service offerings come new resource requirements, especially in locomotives and T&E personnel, the need to ramp up the new business, and the need to mitigate the effects on existing operations. The one big gap remaining is the I-5 Corridor on the west coast, something Krebs hopes to have solved "any day now." The good news is that the last remaining proportional rate obstacles have been removed.

Finally, BNSF will switch over to its new real-time operating systems by July 4. Having one common computer system will simplify and streamline service scheduling, revenue accounting, equipment distribution, and EDI customer interface. With these efficiencies in place, the operating ratio could improve in the second quarter even on a modest increase in revenue. And with that, Gruntal & Co. upgraded BNSF to "outperform" from "outperform speculative" saying, "the shares appear to be oversold by institutions."

Canadian National had great numbers, to say the least. Here again, severe weather had its cost, yet not as much was made of it as at BNSF. Operating income was up 24% over first quarter 1996, the operating ratio dropped more than two points to 85.1 from 87.3, and there was significant revenue growth across most business groups. There was no mention of "NY Network" until Q&A. The remarks were generally vague except to say the idea has had a "warm reception" in Albany, Buffalo, Syracuse. The goal is to protect markets, insure access to competitive rail service. Now talking to NS, CSX and hopes to prevent the CR breakup from "taking customers out of the market." One must question how that could happen. Gateways remain the same, and it's hard to imagine Quebec newsprint or lumber losing out to southern product unless the commodities themselves are overpriced.

Norfolk Southern's first-quarter railway operating revenues were $1.05 billion, up 3 percent from 1996 and an all-time record for any quarter. Net income was $177.5 million before, and $127.8 million after, a one-time charge of $77.2 million to write off the costs of establishing and maintaining a $13 billion credit facility related to its tender offer for all shares of Conrail. Earnings per share were $1.42, up 8%. "Aside from unusual items, this was the seventeenth consecutive quarter of year-to-year improvement in earnings per share," said NS Chairman David Goode.

Regarding the Conrail merger, Norfolk gets about 58% to 42% for CSX. Following some negative effect on earnings in years one and two, NS anticipates a 6% gain in 2000 growing to 17% a year going forward. Capital expenditures on the former CR property will total about 525 MM in years one-three. Moreover, some $1.2 B of the acquisition debt will have been paid off by then and the initial debt/capital ratio of 60% will have been worked down to 55%.

For its part, CSX announced record first-quarter earnings of $151 million, 70 cents per share, up 3% over last year. Rail operating income hit $1.1 billion, up 6%. Operating ratio for the first quarter was a record 77.4 percent, almost three points lower than the prior year's quarter and two points below the ratio achieved in 1995's first quarter. Excluding net costs of $24 million pretax and $16 million after tax relating to CSX's 19.9 percent investment in Conrail, earnings would have been $167 million, 77 cents per share, for the 1997 quarter. These costs were principally interest on debt issued to acquire the investment, less dividends received on the Conrail stock.

CSX has crafted its new NY-Chicago route from a combination of the former NYC to central Ohio and the B&O the rest of the way. Said CSX Chairman Snow, "There's not a hill on it and when we get done it'll be a 70-mph RR once again." New north-south and east-west routes will be set up to avoid choke points like Cincy, saving a day either way. Indy's Avon Yard will take the brunt of the east-west classification. CSX did not provide percentage earnings growth estimates for the merged properties, however they do project accretive cash flows from 11 to 16% three years out after an initial hit of 5%. Capex increases will come to some $488 MM in three years. "All-in" debt/capital is estimated at 50.4% by 2000.

And now for something completely different comes this good news from the Journal of Commerce: "Vietnam said last week the first train of a new passenger service on a meandering colonial-era line would leave Hanoi in the evening and arrive in China's southwestern city of Kunming 30 hours later. Rail links between the two countries were restored at two frontier points 14 months ago, 17 years after they had been severed by a border war. But traffic on the Hanoi-Kunming route has until now been limited to freight. Rail officials said passengers would no longer have to take local trains to the border,

walk across the Lao Cai border bridge and then catch another train on the other side."

Suddenly changing in Atlanta or O'Hare doesn't seem so bad.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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